1、Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.1,SwapsChapter 6,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.2,Nature of Swaps,A swap is an agreement to exchange cash flows at specified future times according to certain specified rules,Opti
2、ons, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.3,An Example of a “Plain Vanilla” Interest Rate Swap,An agreement by Microsoft to receive 6-month LIBOR & pay a fixed rate of 5% per annum every 6 months for 3 years on a notional principal of $100 millionNext slide illustrates
3、cash flows,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.4,Cash Flows to Microsoft(See Table 6.1, page 127),Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.5,Typical Uses of anInterest Rate Swap,Converting a liability fromfixed rate to floati
4、ng rate floating rate to fixed rate,Converting an investment from fixed rate to floating ratefloating rate to fixed rate,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.6,Intel and Microsoft (MS) Transform a Liability(Figure 6.2, page 128),Intel,MS,LIBOR,5%,LIBOR+0.1%,5.2
5、%,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.7,Financial Institution is Involved(Figure 6.4, page 129),F.I.,LIBOR,LIBOR,LIBOR+0.1%,4.985%,5.015%,5.2%,Intel,MS,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.8,Intel and Microsoft (MS) Trans
6、form an Asset(Figure 6.3, page 128),Intel,MS,LIBOR,5%,LIBOR-0.25%,4.7%,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.9,Financial Institution is Involved(See Figure 6.5, page 129),Intel,F.I.,MS,LIBOR,LIBOR,4.7%,5.015%,4.985%,LIBOR-0.25%,Options, Futures, and Other Deriva
7、tives, 5th edition 2002 by John C. Hull,6.10,The Comparative Advantage Argument (Table 6.4, page 132),AAACorp wants to borrow floatingBBBCorp wants to borrow fixed,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.11,The Swap (Figure 6.6, page 132),AAA,BBB,LIBOR,LIBOR+1%,9.
8、95%,10%,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.12,The Swap when a Financial Institution is Involved (Figure 6.7, page 133),AAA,F.I.,BBB,10%,LIBOR,LIBOR,LIBOR+1%,9.93%,9.97%,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.13,Criticism o
9、f the Comparative Advantage Argument,The 10.0% and 11.2% rates available to AAACorp and BBBCorp in fixed rate markets are 5-year ratesThe LIBOR+0.3% and LIBOR+1% rates available in the floating rate market are six-month ratesBBBCorps fixed rate depends on the spread above LIBOR it borrows at in the
10、future,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.14,Valuation of an Interest Rate Swap,Interest rate swaps can be valued as the difference between the value of a fixed-rate bond and the value of a floating-rate bondAlternatively, they can be valued as a portfolio of
11、 forward rate agreements (FRAs),Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.15,Valuation in Terms of Bonds,The fixed rate bond is valued in the usual wayThe floating rate bond is valued by noting that it is worth par immediately after the next payment date,Options, Fu
12、tures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.16,Valuation in Terms of FRAs,Each exchange of payments in an interest rate swap is an FRAThe FRAs can be valued on the assumption that todays forward rates are realized,Options, Futures, and Other Derivatives, 5th edition 2002 by John
13、 C. Hull,6.17,An Example of a Currency Swap,An agreement to pay 11% on a sterling principal of 10,000,000 & receive 8% on a US$ principal of $15,000,000 every year for 5 years,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.18,Exchange of Principal,In an interest rate swa
14、p the principal is not exchangedIn a currency swap the principal is exchanged at the beginning and the end of the swap,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.19,The Cash Flows (Table 6.6, page 140),Year,Dollars,Pounds,$,-millions-,2001,15.00,+10.00,2002,+1.20,1.1
15、0,2003,+1.20,1.10,2004,+1.20,1.10,2005,+1.20,1.10,2006,+16.20,-11.10,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.20,Typical Uses of a Currency Swap,Conversion from a liability in one currency to a liability in another currency,Conversion from an investment in one curr
16、ency to an investment in another currency,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.21,Comparative Advantage Arguments for Currency Swaps (Table 6.7, page 141),General Motors wants to borrow AUDQantas wants to borrow USD,Options, Futures, and Other Derivatives, 5th
17、edition 2002 by John C. Hull,6.22,Valuation of Currency Swaps,Like interest rate swaps, currency swaps can be valued either as the difference between 2 bonds or as a portfolio of forward contracts,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.23,Swaps & Forwards,A swap
18、can be regarded as a convenient way of packaging forward contractsThe “plain vanilla” interest rate swap in our example consisted of 6 FRAsThe “fixed for fixed” currency swap in our example consisted of a cash transaction and 5 forward contracts,Options, Futures, and Other Derivatives, 5th edition 2
19、002 by John C. Hull,6.24,Swaps & Forwards(continued),The value of the swap is the sum of the values of the forward contracts underlying the swap Swaps are normally “at the money” initiallyThis means that it costs nothing to enter into a swapIt does not mean that each forward contract underlying a sw
20、ap is “at the money” initially,Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull,6.25,Credit Risk,A swap is worth zero to a company initiallyAt a future time its value is liable to be either positive or negativeThe company has credit risk exposure only when its value is positive,
